from Persistent to Consistent

Monthly Archives: May 2011

I guess if I was a pessimistic person I’d have given up learning to trade by now… However, this week had several high points, even though I traded out a >6% loss on my account. Here they are in no particular order: –

I learnt a whole bunch of stuff (see below for details)

I know what I didn’t do right

My blog (here) got >300 views in a day (Sweet! Thanks everyone!)

I didn’t repeat previous mistakes (mostly)… and invented some completely new ones! LOL

So overall I’m still feeling positive about the whole experience. I really love trading and completely appreciate the support and interest of everyone reading my stuff so a big and humble thank you for all those showing interest. It’s extremely motivational and that helps greatly!

Let’s look at Thursday when, essentially, I got way too active and just took a truck load of dumb trades. Then I’ll go through the stuff I did today and subsequent improvements… PRE-READ warning… This is a long post… Get a cuppa and some biscuits… and lets begin!

Trading mistake number 1.

Placing orders to open on the FTSE before opening…

Yes, I realise I’ve done this before – but this time it’s different! No, honest guv! Except it’s not, and is still a rather random move. Who know’s really what direction the market will move in and why? Essentially my crystal ball is the same as everyone else’s.

So, entered long at 5896 at about 6:50 am without due care and attention to the fact that the price was slap in the middle of exactly nowhere and it thrashed wildly between profit and loss till 4pm when I got stopped out (stop too near previous support) then proceeded to rally 50 points when the US session kicked into high gear.

So retrospectively pretty ridiculous however I’ve now traced the root ’cause of the problem so read on for some thrilling conclusions…

Trading mistake number 2.

Making dumbass bets against the trend without due care and attention…

Here it’s truly possible to say that a picture paints a thousand words… Went short somewhere in the early morning of the 26th… A thousand dumb, dumb words painted right here…😉

This is quite an interesting one because I was kind of ‘half’ right on the first count… in fact the best entry point was actually passed when I went long on this trade. Looking back there was a bounce off 14,150 about 10.30 a.m. confirmed by a nice big up bar from support. I guess by this time I was feeling a little bit desperate about the whole situation and as I’ve mentioned before ‘lizard brain’ gets all frantic when it feels under pressure… Essentially I’m just winging it at this point…

In the second part I was slightly more sensible but failed to really consider what was going on. Where as the previous drop (10:30 a.m.) was followed by a pretty immediate and sharp reversal the price bounced across a 50 point range for around 45 minutes before I decided (bizarrely) to go short in a market that was overall trending up! Wow! Yes, I too am amazed. Anyway, I just wasn’t patient enough to wait for a proper entry signal…

Trading mistake number 5.

Didn’t stay in the trade…

This one’s especially galling because I went short on USDCHF and it was going in my direction… However, by this time I closed the trade for a tiny profit essentially because I was pissed off with the whole proceeding. Now, if I’d have let that one run I’d have made all my losses back at least while I was asleep which is almost ironic. Take myself out of the equation and I’m a great trader. LOL…

So, some people might say that’s pretty darn shocking. Purely on a ‘results’ basis they’d be right. Right! However, failure is only really failure if you give up or don’t learn anything from the experience. Here are some of the things I learnt and the actions I’ve taken.

Learning number 1

SIMPLIFY…

If you’ve looked at previous charts on my blog you might have seen a bunch of indicators and other stuff. This is now all gone. Frankly it’s confusing and doesn’t really assist me in making decisions. In fact all this extra information means my poor brain gets confused and I actually don’t trade. Informational paralysis sets in and I think too much about thinking rather than simply looking with my eyes.

I also removed the day bar settings i.e. instead of alternating grey/white stripes for each day on shorter time-frames so the whole screen is grey, whatever time frame I’m on. Why? Well, because I found my self trying to ‘analyse’ the price movement in relation to day sized chunks. Does the market know it’s 12:31 on a Tuesday or 19:42 on a Friday evening? No. Is thinking about this getting in my way? Yes! So it’s magically gone.

Learning number 2

RELAX…

This could also be entitled ‘Hold onto your money and wait’🙂 Hopefully you can see from the examples above that in most cases I was too eager to trade. What do I mean by that? Well… what I’ve observed and also seen in various books is that when prices reach zone’s of previous potential support/resistance they will react in a specific way. Ultimately they will go long or short and there may be some false breakouts on the way but when a level is broken up or down it’s usually followed by a fair bit of movement and a confirmation signal (candle)

So, since these moves occur around specific levels the strategy has to be to simply relax and wait for the price to confirm a move.

The worst thing you can do is think “Well, I missed that confirmation by 90 minutes but I’m still going to enter the trade long/short.” STEP AWAY FROM THE KEYBOARD! You are now inviting the market to take money from you. A whole 90 minutes ago the consensus was ‘X’ and now it could be ‘Y’ going in the opposite direction! Who knows? Berlusconi could have been found in the ‘Blue Oyster Bar’ (see Police Academy for the reference) and is threatening to leave the EURO unless the whole thing is suppressed… A lot can happen in the intervening time but what should have happened if you had noticed the trade is you could have moved your stop up to reduce risk/potential losses😉

The market doesn’t care about you. You must care about you and your money enough to not risk it unduly and take punts. Take properly managed risks instead. There will be another trade along soon. What I actually did today was program IG Index’s advanced charts to pop-up an alert when the price got to a previous area of support or hit a previous area of resistance. THEN you can decide, from what actually happens to the price whether there’s the opportunity to go long or short.

Wait and let the market do the heavy lifting. Here’s trade I placed today that illustrates the right way to do things…

With this new found wisdom I was able to pay attention and notice the following…

The price is on an uptrend (that’s a victory right there)

It’s gotten to 14,250 a couple times and dropped back

It’s dropped sharply back and then reversed to carry on in the original direction

Actually what I did was put a price alert in first thing in the morning and wait. Secure in the knowledge I’ll get a pop-up when something interesting might happen and I can get on with other stuff in the meantime… I have no idea whether it’s going to carry on up or drop but what I do know is that it did drop previously but when it falls then reverses this is a great LONG opportunity. Or alternatively it’ll stay above 14,250 and keep piling onto new highs for the day.

I’m aware of this being tradable and I’m looking for a good entry point which is confirmed by the price doing something. Now, one thing I didn’t quite get right here is that I brought my stop up to entry too quickly and was stopped out on a temporary retracement shortly afterwards. However I did two things right. I followed my newly aquired strategy (SIMPLIFY) and waited for the trade to come to me (1) which is way more RELAXING and I didn’t lose money (2)

I do also have a theory I’m working on based on the following two graphs which will illustrate the point. It may as well go here so I can go for the longest blog post record attempt😉

Graph A

Graph B

Both graphs represent 10 trades but graph B shows the effect on overall profitability of the stops being moved up to break even aggressively. In this (admittedly) textbook example the results overall of graph A is a +120 point gain. Graph B illustrates a +240 point gain. I know which one I’d rather have. Now, of course there might be occasions where a potential 60/80 or 120 point winner could have been never happened because it had been stopped out in the first few periods… this does need looking at further and tracking over a lot more trades.

Think about it this way though. If you’re trading it’s about managing risk. Placing a trade with a stop (always) and then waiting for the price to rise to a point where it might at least be sensible to consider moving that stop to break even is where all the risk is in the trade. This is the bit you’re going to lose in a trade if you’re going to lose anything.

Now, this is only in here because it’s on my mind at the moment. It’s absolutely not something I recommend people go and implement in their trading at all! I guess for this to work you’d have to combine selecting (and taking) a good entry with the trade going pretty much in your favour immediately. It might prevent lots of little losses on more marginal trades or it might well mess up the overall profitability of your approach altogether.

Overall I had a great week trading. No, I didn’t make money but I made some positive changes to my technical approach and the mental/emotional management of what I was doing improved hugely. I can look at a chart and decide how to react when the price reaches levels of previous importance. I’ve cleared up what I’m looking at so that trends/direction should be much more obvious in future and I can react accordingly.

Technical approach

Only trade from levels and with the trend (unless it’s obvious the world has ended) I will post about this some other time…

Mental/emotional approach

Relax and let the trades come to you. If you missed it then you missed it. Don’t try to force the market. You are not a Jedi

So now it’s simply a matter of practice, and buying more biscuits… Ach no! My tea has gone cold!

Like this:

Here’s an interesting thought that occurred to me on the way back from the gym today. Partly because I’m short right now on GBPUSD but mainly because it’s been quietly forming in the back of my mind for a while…

In trading there absolutely are a number of things that are totally within your control. I think that in the beginning of learning to trade even these things seem like some sort of voodoo science. Every small detail forms part of the elusive ‘holy grail’ which everyone starts off looking for in order to become an excellent trader. Let’s just get one thing clear straight off – there is no ‘holy grail’ and what works for me will not necessarily work for you. Bummer eh?😉

However – salvation is at hand because (I’m finally getting to it) there really are a number of things you can do to elevate yourself above a great number of people out there who are also trading… or learning to. I think we should all be able to draw comfort from the following: –

You can absolutely control the amount you risk you take when placing a trade. Just make an inviolable rule. I will risk no more than 1% of my account per trade. Now, my number is actually 1.5% because for me 2% sounds like too much (it’s a gut thing) and from experience, because of my account size, I like as much leeway as I can get on my stop losses. So, maximum risk per trade? It’s up to you. You control this. Bloody well use a stop loss!

You can choose how you react to a loss (If you have one) so treat it as an opportunity to learn and get better. Do NOT pile back into the market like an idiot looking to make your losses good. Emotional decisions are usually crappy decisions…

Accept that you don’t actually know whether the market is going to go up or down and plan accordingly. Along the lines of the following dialogue example “GBPUSD overall is in a downtrend and on three previous occasions has got close to 16,300 and dropped back. So I am going to short this with a stop above 16,300 risking just 1.5% of my account to make 3% return as a first target then moving my target down to 16,100 which is the previous low.” “If the trade goes in my favour I will consider bailing out at below 16,200 because there’s a lot of support here.” By time this happens I may well be asleep…

Now, actually points 2 and 3 rest on you reacting to the original decision of “I will risk no more than X% of my account per trade”. Just doing this and considering what you’re doing is probably the one thing I’d absolutely stick to in order to keep trading and so that you stay in there for the long run as you improve. Focussing on this one thing gives you enough power over this strange new environment to help make better decisions.

Psychologically having a sense of control is a deep, deep need linked directly to the fight/flight response and this has a huge impact on your overall sense of well being. Try making a trading decision when your lizard brain is running around like a lunatic in the background going “AAAAAAAAARGH! OMFG! We’re all gonna DIE!”

Yep, it doesn’t work because if there’s any part of your brain doing that your emotions will be all over the shop.

If all else fails you can repeat to yourself “I am only risking X% of my account, let’s make a positive decision whether this is a good trade to make and then place the trade” Hopefully lizard brain will get the message that this is no biggie and let you make a rational and stress free decision.

Personally I’ve found the voice in my head (audible learning modality, taking information in and internalising it by listening) to be quite a negative influence on my decision making when I’m in a trade or thinking of placing one. Interestingly I’m a very, very visual person (of course this helps with charts) but since my ‘eyes’ don’t have a voice (keep following me on this) the negative part of my brain gets too much airtime. So I’m essentially using my conscious, reasoning mind to exert some control over my emotional reaction (triggered by the audible voice in my head) by talking out loud over the part of my mind which has a tendency to be too filled with doom and gloom…

Discovering how to control what goes on between your ears when trading means, as you gain more practice/exposure to the process, your results will improve and lizard brain will chill the heck out.

‘How do you eat an elephant?’ One bite at a time… Rome wasn’t built in a day… etc.

Another significant reason why people fail is by being overwhelmed by the size of a task. If you’re over weight then thinking or visualising yourself as an underwear model will likely be a significant de-motivator rather then something to help you get into the gym regularly.

And so with trading… Put yourself under pressure to make 300 points a day, increase your account size by 10% per week or stop working and trade full time immediately (without having the means to do so) will just see you freak out, blow up your account and create a massive future barrier to doing anything. You have to take steps forward every day, crawl, walk, run and only then can you consider flying😉

So here are some possible ‘chunks’ to break the journey down into.

Habitual chunks

Get up at the same time every day, analyse the markets, record what’s going on, record some possible setups, take note of what happened the previous day. Do this every day for two weeks (first target) then for a month (second target) then three months (final target… by which time this should be so ingrained you can’t not do it.

Learning Chunks

What courses, books, people do I have to read or learn/study from in order to kick arse? More on this in Part 4 (coming soon)

Some things to do – but not all at once

Trading business plan (I will publish mine at some point), Setups (what you’re actually going to use), Improve your emotional management of trades (i.e. don’t freak out) and pull the trigger when you have to. Treat trading as a business.

Goals (in easily digestible stages)

Get consistent – minimize the downside and stop emotionally reacting to losses by trying to ‘pile back into the market’

£50 per week – just slowly build your account – gain confidence

£100 per week – stretch for the goal

x(?) per day – now we’re getting somewhere

Increase account size – takes discipline to not blow the money you’ve made on gadgets😉

Write down the strategies and record the effectiveness of each one under different market conditions. What works? What doesn’t work?

You can’t do it all at once or go from zero to hero immediately. Break the whole thing into smaller steps. Try to do a piece of the puzzle every day. Take pressure off yourself and enjoy the process. Aim for consistency and create new habits🙂

Concentrate on the right behaviour and the results will begin to take care of themselves.

Like this:

If you really do want to teach yourself a new skill then it takes a degree of self discipline to keep our ‘eyes on the prize’ so to speak… I know this because I’m formally a competition level procrastinator😉 There have been so very many times in the past where I’ve wanted to change some particular circumstance in my life and even with an extremely compelling reasons completely failed to do so.

I believe the majority of people (who do change) probably make their first step in a new direction for the simple reason that the situation they are in finally becomes intolerable and their subconscious mind finally, finally kicks in to help them save their arse/life/house/job/relationship or whatever.

It might be only after a person has made their first significant change by owning and taking responsibility for something that they have a ‘light-bulb’ moment and realise there may be other (less painful) things about their lives they can actually work on changing. They begin to work on going towards something good rather than trying to flee from something bad.

Still, even with a better perspective it’s always a massive temptation to do something else. So here are a few ‘tricks’ that I’ve successfully used to prevent me just giving up or not concentrating on what I’ve decided to do….

Record the time you spend on a particular subject. This is a trick I borrowed from Jerry Seinfeld who used it to make sure he was always writing and coming up with new material every day. What you do is print out a monthly calendar and then pick a highlighter colour to denote a particular activity. I used green for trading and yellow for going to the gym. Each hour spent solely on trading gets a green line. Count up the green lines and keep score. Here’s a photo of my calendar for March (I think)

Another reason for recording time actually spent on a particular subject is the (now well know) study quoted by Malcolm Gladwell in his book ‘Outliers’ that references research showing that mastery of a subject comes not with innate skill, intelligence or luck but through practice. In fact it’s around 10,000 hours or 3 hours per day for 10 years… Now do you see why ‘Desire’ is so important? To spend such a long time in the practice of a particular skill you’ve really got to keep on the ball. For me, sitting here writing this I’m on 191 hours. In my whole adult life I can’t think of anything I’ve spent, well, anything like this amount of time on. With a (more than) full time job I’m only managing to average 30 hours per month on trading… Since my goal for this year is actually 1000 hours I’m not even close to nailing this right now… I’ll have to get in 115 hours a month for the next 7 months to hit this target. Getting in about 4 Hours per day is probably pushing it… but we’ll have to wait and see.

The following point may apply more to us guys but I think it’s worth mentioning. Time is precious so attempting to concentrate on a large number of ‘things’ in parallel is very difficult. For me the magic number seems to be three. These currently consist of work, fitness and teaching myself to trade. That’s it, my life is full up! This may explain why I’m currently single – or if it’s not related it’s certainly a convenient excuse, right? (LOL) So pick three things and focus on them. More than three and you tend to end up stressing yourself out too much..

Recognise that simply ‘dicking about’ is not really getting you anywhere. This includes un-productive use of time like watching TV. It’s worth thinking about how you remove the temptation to just mess about and sit passively from your life. For me, I don’t have a TV and I really, really had to sell my X-Box, again because of my competition level procrastination… Low attention threshold? Anyone?

What you’re really trying to do here is set up a new routine and get into a new habit. I’ve done this with exercise/fitness so I know I can do this with something more cerebral like trading. With working out I get a big endorphins high and if I don’t go to the gym for a week I notice I start to get slightly depressed or my thinking goes a little negative. I’ve not quite got to that ‘must do’ stage with trading yet, but that’s because really I’m still in the initial ‘what am I doing?’ stage without the payback coming often enough to create the virtuous circle necessary to re-enforce a particular behaviour.

Like this:

It’s been a really educational day looking at EURUSD on forex! (I love learning lessons that aren’t expensive – lol)

So started looking at EURUSD this morning where there had been a couple of bounces off 14,300 so was waiting for an opportunity to go long as the up-trend resumed. All looking rosy and the price bibbled about flirting with 14305… so I essentially had a positive long strategy which had a high probability of success potentially and a minimal downside. It’s all super. See the black arrow on the chart

What I completely failed to consider was a short strategy. This shows up an alarming lack of mental flexibility on my part by not considering what to do if the price didn’t go in the direction I’d previously considered… Definitely not a way I want to continue to operate in the future.

Even on the short side i.e. price dropping below 14,300 this would still have been a trade with a limited risk and high probability.

This type of behaviour derives from what’s called ‘perceptual bias’ which is simply explained as looking for evidence to back up a previously formed opinion. If someone points out that there are a large number of red cars on the road you’ll suddenly start seeing loads of red cars everywhere… So the answer would be to always consider both sides of the coin, both long and short – right?

What’s really galling is that there’s a lovely bearish engulfing candle at the point where the price failed to get back to 14,340 and dropped through the deck😉 but to quote Jack Welch ‘Fail Often, Fail Fast, Fail Cheap’

Like this:

So as Napoleon Dynamite says “You gotta have skills, man” and that’s exactly my approach right there. However, what you aren’t really taught in school is how to actually learn. I believe if pupils were actually taught from an early age how to learn for themselves then we’d all have an entirely different outlook. To be completely honest, by the time I left school I was entirely sick of sitting and learning.

It took me a long time to realise the value of the education I received and to understand the importance of adapting by being able to teach myself new skills.

Since I realised this (now, blindingly obvious) fact I’ve nearly doubled my income just be refusing to be in a position where I don’t know how to do something. Need to understand some program? Buy a book and go through it. Need to learn how to manage projects? Again, there are many courses and sources of information about this subject.

However, the challenge with trading is that it’s not linear (not even close) and doesn’t follow the usual do ‘x’ get ‘y’ result path that most skills have. If, as I’ve done, you want to improve your fitness then the steps are relatively easy.

Figure out your starting point

Figure out where you want to end up

Sort out your diet

Commence and exercise plan

Rinse and repeat until you reach your goal…

Now, writing it down like that makes it look easy and improving your physique relies on a simple formula involving effort, calories and the frequency of exercise. Now compare this with the sheer volume of people trying to tell you how to improve your physique or catapult your trading results into the stratosphere! It is indeed a confusing and distorted picture. Hopefully this handy guide will hopefully shorten your learning curve and provide a framework within which you can teach yourself to achieve greatness.

Essentially there are 6 components

Desire – Why do you really want this goal?

Focus – How are you going to keep yourself pointed at this goal?

Chunking – What are the smaller steps to reach this big goal?

Learning – What do you need to learn? What’s your plan for learning?

Feedback – How will you measure your progress and course correct?

Rewards – How will you reward yourself as you move towards your goal?

So let’s not hesitate and jump straight into the first part…

DESIRE…

Let’s be frank about this – you gotta want it. To become an expert at anything means you’re really going to have to put the time in consistently over a number of years. Now, I’m aiming for a level of expertise that means I do achieve the much sold dream of being able to trade from a beach with a laptop and an internet connection. Personally I don’t like beaches but it’s that level of freedom and independence that really appeals to me. How you think about it is completely up to you. How you dream about it working is completely up to you.

Again, you have to really, really want it. If 35%-10% of traders are consistently taking money from the other 65%-90% then I want to be in the top 5%. All the rewards go to the people with the most skill. If you’ve attended any events or trading training it’s always the people who are so darn good doing the talking. They’re excellent presenters who know their subjects because they’ve been doing it for 5,10, 20 years. And they are still learning…

Are you able to make that level of commitment towards freedom and independence? Will you ever give up? Most of the people I was on a traders course have already. For me it’s a constant battle to keep an eye on what the markets are doing because my work situation right now is just bonkers. Am I going to stop? No. Am I trading as much as I’d like? No. Can I give up my job and just trade? Hahahaha… No… so I’m figuring out ways to work around it. All the obstacles possible will appear and have a good attempt at stopping you pursuing your dreams.

At this point… in the fine tradition of ‘self help’… an analogy😉

Approximately 5 years ago, for a number of personal reasons I was unfit, getting fat and not very happy. So I began running. In the beginning I could not even run 5 minutes without essentially coming to a stop and trying not to throw up a lung. Running when you’re extremely crap at it and looking like s**t is an embarrassing experience. However I persevered and a few years later managed to complete an ultra-marathon (yes, it’s crazy) then started going to the gym because I still wanted to look better, fitter, more muscular etc. Now, in the first year I did ok but didn’t really know what I was doing. Second year? Improving but not by much – generally frustrated by the whole experience but still working out 2-3 times per week… This year? Changed my diet totally, recording everything I do, lifting far more than ever, reaching for big targets. EASY!!

(Still not quite 100% there yet but now I’m completely sure that I will get there – eventually)

So I guess what I’m trying to say is that doing something with desire and not giving up for a consistent period of time means that there is a certain inevitability to success. All you need to do is want what your aiming for and not give up. You will get there. Just don’t give up!!

I know I should probably write more about my personal ‘why’ regards trading but I’d rather you thought about your own reasons than read about mine. Concentrate on something hard enough for long enough means you also have to relax about the time-scale and accept you need to enjoy the journey, the process. Writing about the process is also interesting for me so keep an eye out for part 2 coming soon about how to keep Focus on your goal…

Like this:

I’m always on the look-out for the best tools to manage my life. Less time spent managing or trying to hang on to things in my head means more time for creativity and thinking… I simply like to be organised so that I can relax. Here are some highly recommended tools to help organise your ‘stuff’… Remember, if you’re managing your trading as a business (and you should be) then you need to be organised enough to dedicate time to it.

To Do list – Google Market App – ASTRID

Simply the best to-do list manager for Android phones which sync’s with google tasks. Coming soon to a PC screen near you also. I have no idea what the heck ‘Social Productivity’ might be but you can check it out here: www.astrid.com or www.weloveastrid.com (apologies, I don’t own an iPhone)

Brain-storming and mind mapping – TheBrain

Simply awesome and hugely powerful for recording absolutely everything about a subject, a number of subjects and everything going on in your head. All your ideas and crazy dreams can all go in here and it’s visible and interlinked. I am a huge believer in mind-maps and brainstorming so I’m a big fan of this (having tired all the other ones). More on The Brain in posts to come but go have a look here as it’s free to trial

Trade recording – Filemaker

Now, I am not an IT wizard so don’t have anything near the patience or skills to get my head around SQL or attempt to do this myself, however, those nice people at Filemaker have done it for me. I use a database to record my trades and analysis – not a spreadsheet. More on this shortly about why and how it works for me but you can go check it out here.

And finally, unless you’re using a Mac, for your own sanity and peace of mind (if you’ve not already done this) you need to go upgrade your kit to run Windows 7. No, really, it’s about time. I know it’s alot to pay for a toolbar😉 but actually means having a lot of charts open it’s really easy to manage what you’re doing. Regret not upgrading from Vista a lot sooner.

So hopefully that’s useful to some people. Next up (Wed?) will be part 1 of 6 on ‘Teaching yourself to trade‘ which can apply to anything (but of course using trading as an example) and references tricks and tips I’ve used to achieve successful outcomes in learning a new thing.